Livestock Risk Protection Insurance (LRP) Overview

1. Livestock Risk Protection Insurance (LRP) Overview Bill Halfman Ag Agent UW-EX Monroe County Paul Mitchell Ag and Applied Economics UW-Madison and UW-EX Kelley Braneman Badgerland Farm Credit Services

2. What is LRP? • Insurance policy that protects livestock producers from unexpected price declines • Similar to crop insurance • Creates “floor” for price • Because market futures are a major factor determining available coverage prices, so LRP takes into account “expected” price changes

3. LRP available for • Feeder calves (8 different types) • Steers, heifers, Braham, or dairy • < 600 lbs or 600-900 lbs target weight • Fed cattle (weighing 1,000 – 1,400 lbs) • Swine: Market hogs on carcass (lean) base

4. LRP – Feeder Cattle • Available coverage prices range approximately 70-95% of Chicago Mercantile Exchange (CME) futures price • Policies generally available for the following weekly lengths 13, 17, 21, 26, 30, 34, 39, 43, 47, 52 • Policy Size: 1 to 1,000 head per Specific Coverage Endorsement (SCE) • 2,000/year maximum (July 1–June 30)

5. Feeder Cattle Types • LRP recognizes 8 different feeder cattle types to adjust available coverage prices • Buy separate policies for each type of feeder cattle you insure

6. LRP – Fed Cattle • Available coverage prices range approximately 70-95% of CME futures price • Policies generally available for the following weekly lengths 13, 17, 21, 26, 30, 34, 39, 43, 47, 52 • Policy Size: 1 to 2,000 head per SCE with 4,000/year maximum

7. LRP-Swine (Market Hogs) • Available coverage prices range approximately 70-95% of CME futures price • Convert live weight to carcass/lean weight • Carcass/lean weight = 0.74 x live weight • Policies for the following weekly lengths 13, 17, 21, 26 • Policy size: 1 to 10,000 head per SCE, with 32,000 maximum per year

8. How do I buy LRP? 1) File LRP insurance application with a certified agent to establish eligibility in advance SS#/employer ID, Demonstrate Substantial Beneficial Interest (minimum of 10% ownership of animals) 2) Watch available prices & premiums, they change daily, valid from 5 PM to 9 AM next business day www3.rma.usda.gov/apps/livestock_reports/lrp_select_criteria.cfm 3) All coverage periods may not be available due to insufficient market data 4) When you like what you see, file a Specific Coverage Endorsement (SCE) with your agent You must own livestock when filing SCE

9. What is the SCE? Specific Coverage Endorsement (SCE) specifies: 1) Actual Coverage Price (chosen price floor) 2) Ending Period (date actual price calculated) 3) Number (and type) of animals 4) Target Weight at ending period 5) Premium due (RMA gives 13% subsidy) RMA may terminate availability at any time (but not the existing policies sold)

10. Feeder Cattle Example • Have 25 steers with 100% ownership • Expect to sell in 21 weeks at 1,000 pounds • On RMA web site for the day, want the coverage price of $98.40/cwt for 21 weeks • Cost is $1.527/cwt (with 13% subsidy) • $1.527 x 10 cwt = $15.27 per head • 25 x $15.27 = $381.75 total premium

11. When do I collect an Indemnity? • If the Actual Ending Value the RMA posts on the web for the Ending Period you choose is less than the coverage price you chose • Not the price you actually receive when sell NOTE: • Do not have to sell when SCE expires • Can hold and insure qualifying animals again after SCE expires

12. Example Indemnity • Had 25 feeder cattle insured for $98.40/cwt in 21 weeks • After 21 weeks, suppose the Actual Ending Value posted by RMA is $98.10 • Collect ($98.40 - $98.10) = $0.30/cwt • $0.30 x 10 cwt = $3.00 per head • 25 head x $3.00/head = $75.00

13. Actual price, date, weight ≠LRP price, date, weight • When do you actually sell your cattle? • What price do you actually get? • What do they actually weigh? • Do you hold the cattle and buy LRP-Fed Cattle?

14. LRP-Fed Cattle Example • 25 cattle to sell at 1200 lbs in 34 weeks • On RMA web site for the day, want the coverage price of $68.96/cwt for 34 weeks • Cost is $1.037/cwt (with 13% subsidy) • $1.037 x 12 cwt = $12.44 per head • 25 x $12.44 = $311.10 total premium

15. Example Indemnity • Have 25 fed cattle insured at $68.96/cwt in 34 weeks • After 34 weeks, suppose the Actual Ending Value posted by RMA is $69.01/cwt • Collect no indemnity • May actually sell them at 1245 lbs for $69.50/cwt after 35 weeks

16. Some Benefits of LRP • More attractive to smaller producers than other risk management tools • Small numbers can be hedged • No brokerage costs or margin calls • Premium subsidized 13% • Does not tie you to a specific packer or buyer like a forward contract can

17. Benefits Continued • Actual selling dates and weights can differ from what the SCE specifies • Do not have to sell when SCE expires • Can hold and insure qualifying animals again after SCE expires

18. Benefits Continued • Policy can be transferred to new owner if animals sold during coverage • Can assign indemnity to a third party • Lender for example • If some animals die, report within 72 hours when known, and still collect any indemnity for those animals

19. Limits to LRP • If you purchase LRP, cannot enter into futures or options on the same animals • Must own the animals when file the SCE • Lose LRP coverage and premium if sell earlier than 30 days before SCE expires (but can transfer to the new owner if sell)

20. Some Concerns • WI prices not used in formulas, so WI producers may be exposed to more risk • Actual price you sell the animals for can differ from the Actual Ending Value • Does not pay indemnities for: • Slower than expected gain • Disease, weather, poor feed • Does not pay full value for death or theft • RMA can suspend at any time

21. Questions for UWEX • Brenda Boetel, UW-Riverfalls 715-425-0702, brenda.boetel@ces.uwex.edu • Bill Halfman, UWEX, Monroe County 608-269-8722, bill.halfman@ces.uwex.edu • Paul Mitchell, UW-Madison 608-265-6514, mitchell@aae.wisc.edu RMA Certified Agent Kelley Braneman, Badgerland Farm Credit Services 888-227-3243 or 920-261-2275 Kelley.Breneman@badgerlandfcs.com